AbstractIn recent work, the concentration index has been widely used as a measure of income‐related health inequality. The purpose of this note is to illustrate two different methods for decomposing the overall health concentration index using data collected from a Short Form (SF‐36) survey of the general Australian population conducted in 1995. For simplicity, we focus on the physical functioning scale of the SF‐36. Firstly we examine decomposition ‘by component’ by separating the concentration index for the physical functioning scale into the ten items on which it is based. The results show that the items contribute differently to the overall inequality measure, i.e. two of the items contributed 13% and 5%, respectively, to the overall measure. Second, to illustrate the ‘by subgroup’ method we decompose the concentration index by employment status. This involves separating the population into two groups: individuals currently in employment; and individuals not currently employed. We find that the inequality between these groups is about five times greater than the inequality within each group. These methods provide insights into the nature of inequality that can be used to inform policy design to reduce income related health inequalities. Copyright © 2002 John Wiley & Sons, Ltd.